All Politics is now Global

Saudi Fears Over Emerging Russia-Iran Energy Nexus

Any weakening of Russian support for Mr. Assad could be one of the first signs that the recent tumult in the oil market is having an impact on global statecraft. Saudi officials have said publicly that the price of oil reflects only global supply and demand, and they have insisted that Saudi Arabia will not let geopolitics drive its economic agenda. But they believe that there could be ancillary diplomatic benefits to the country’s current strategy of allowing oil prices to stay low — including a chance to negotiate an exit for Mr. Assad.

At the time, we pointed to the piece as evidence that yet another conspiracy “theory” has become conspiracy “fact” as it effectively served to validate (to the extent The New York Times is validation) the thesis that at the end of the day, this is all about energy.

If the Saudis could use oil prices to force Moscow into ceding support for Bashar al-Assad in Syria, then the West and its regional allies could get on with facilitating his ouster by way of arming and training rebels. Once Assad was gone, a puppet government could be installed (after some farce of an election that would invariably pit two Western-backed candidates against each other) then Riyadh, Doha, and Ankara could work with the new government in Damascus to craft energy deals that would not only be extremely lucrative for all involved, but would also help to break Gazprom’s iron grip on energy supplies to Europe.

Those are the “ancillary diplomatic benefits” mentioned in The Times piece.

Only it didn’t work out that way.

Instead, Russia just kind of rolled with the economic punches (so to speak) and while there’s probably only so much pain Moscow can take between low oil prices and Western sanctions, Putin has apparently not yet reached the threshold.

…

Additionally, Riyadh decided to fight a proxy war with Iran in Yemen and, combined with the necessity of maintaining the status quo in terms of the lifestyle of the everyday Saudi, the kingdom is literally going broke as the budget deficit is set to come in at an astounding 20 percent of GDP and the current account plunges into the red as well.

As for the Russians, not only did they not abandon their support for Assad, they in fact struck up a closer alliance with Iran, whose oil supply threatens to add to the global deflationary supply glut once sanctions are fully lifted (by the way, Sunday is “Adoption Day” for the nuclear deal), on the way to restoring the Assad regime in an all-out military invasion.

Adding insult to injury (or “energy” as it were), Russia briefly topped the Saudis as the top supplier of crude to China in May.

…

As you can see, all of this is inextricably connected. The above represents the intersection of i) energy, ii) geopolitics, iii) the global economic slowdown as exemplified by China’s hard landing, and iv) monetary policy.

Now that Russia and Iran have cemented their alliance and look set to control the future of Syrian politics, the Saudis are rushing to establish a foothold in traditionally Russian-dominated markets. Both Moscow and Riyadh will suffer if Chinese demand doesn’t rebound swiftly or worse, continues to decline. Meanwhile, as long as the cost of capital is zero, at least some uneconomic U.S. supply will likely remain online, pressuring prices further and perpetuating the entire dynamic.